BAJAJ BROKING
July 14, 2025
4 mins read
The total expense ratio (TER) in mutual funds is a percentage that reflects the costs involved in managing and operating an investment fund. It covers a range of expenses, including fund management fees, marketing and distribution costs, legal and audit fees, and other administrative expenses. These costs are deducted from the fund’s returns, making TER a key factor for investors evaluating the efficiency and profitability of a mutual fund.
When investing in a mutual fund, the TER in mutual fund is important because it affects the net returns received by the investor. For instance, if a fund generates 8% returns and has a TER of 1.5%, the effective return to the investor is 6.5%. Hence, understanding and comparing the TER of different schemes is essential before making investment decisions.
What is TER in mutual fund? It is the fee charged by the asset management company (AMC) for managing the mutual fund scheme. This fee is automatically deducted from the fund’s value, and investors do not need to pay it separately. Higher TERs indicate that a greater portion of the investor’s returns is used to cover fund expenses, potentially lowering the net returns.
Investors should always check the total expense ratio before choosing a mutual fund. Actively managed funds generally have higher TERs due to frequent trading and research costs, while passive funds, such as index funds, tend to have lower TERs as they track market indices with minimal intervention.
The total expense ratio (TER) is the cost incurred by a mutual fund to manage and operate the fund. It is expressed as a percentage of the fund’s assets under management (AUM) and covers all expenses, including fund management, legal, audit, and operational costs. TER is an essential metric for investors as it provides insights into the overall cost of investing in a particular mutual fund.
What is TER in mutual fund? It refers to the proportion of the total fund expenses deducted from the AUM, directly impacting the fund's returns. Higher TERs lead to lower net returns for investors, while lower TERs ensure that more of the fund’s profits reach the investor. Therefore, investors use TER to evaluate whether a fund is cost-efficient.
TER is an indicator of a fund’s operational efficiency. Actively managed funds usually have higher TERs due to the extensive research and trading involved, whereas passively managed funds or index funds generally have lower TERs because they involve minimal management and operational costs.
The total expense ratio works by accounting for the costs involved in managing and operating a mutual fund. These costs include fund management fees, marketing and distribution expenses, brokerage costs, legal and audit fees, and other administrative charges. The combined cost is expressed as a percentage of the fund’s assets, which directly affects the investor’s returns.
What is TER in mutual fund? It is deducted from the fund’s returns before calculating the net asset value (NAV). This means investors do not make separate payments for the expenses, as they are automatically adjusted within the fund. For example, if a fund generates 10% returns with a TER of 1.5%, the investor receives a net return of 8.5%.
The size and type of the fund influence the TER in mutual fund. Larger funds can distribute costs across a wider asset base, resulting in a lower TER. Conversely, smaller funds tend to have higher TERs because the fixed costs are distributed across fewer assets.
Actively managed funds often have higher TERs due to frequent trading and research, while passive funds, which replicate an index’s performance, incur fewer costs and typically have lower TERs. Understanding the relationship between TER and fund type is crucial for evaluating a mutual fund’s long-term potential.
The formula for calculating the total expense ratio (TER) is:
TER = (Total Costs Incurred / Total Net Assets) × 100
Total Costs Incurred include all expenses related to managing the fund, such as fund manager fees, marketing, distribution, audit, legal, and other operational expenses.
Total Net Assets represent the combined market value of all assets held by the fund after deducting liabilities.
Identify Total Costs: This includes all management and operational expenses associated with the fund. The details can be obtained from the fund’s financial disclosures or prospectus.
Determine Total Net Assets: Calculate the fund’s total assets under management (AUM) after deducting any liabilities.
Apply the Formula: Divide the total costs by the total net assets and multiply by 100 to express the result as a percentage.
For example:
If a mutual fund incurs ₹5,00,000 in total expenses and has a total AUM of ₹50 crore, the TER is calculated as:
TER = (5,00,000/5,00, 00, 00, 000) x 100% = 0.10%
This percentage is deducted from the fund’s returns, impacting the net returns available to the investor.
Understanding and evaluating the TER in mutual fund helps investors make informed decisions by comparing the cost-efficiency of different funds.
To calculate the total expense ratio (TER), you need to determine the total costs incurred by the fund and its total net assets. TER is expressed as a percentage and reflects the annual cost of managing a mutual fund. Understanding how to calculate TER helps investors evaluate the cost-efficiency of different mutual funds.
The formula is:
TER = (Total Costs Incurred/Total Net Assets) × 100
Total Costs Incurred: This includes all operational costs such as management fees, marketing expenses, legal, and audit costs.
Total Net Assets: This refers to the combined market value of the fund’s assets after deducting all liabilities.
Gather Total Costs: Identify all expenses related to managing the fund. These can be found in the fund's prospectus or financial disclosures.
Determine Total Net Assets: Calculate the fund's total assets under management (AUM) after deducting liabilities.
Apply the Formula: Divide the total costs by the total net assets and multiply by 100 to express the result as a percentage.
For instance, if a mutual fund incurs expenses of ₹5,00,000 and has total net assets worth ₹50 crore, the TER in mutual fund would be:
TER = (5,00,000/5,00, 00, 00, 000) x 100% = 0.10%
Several components contribute to the TER in mutual fund, which is deducted from the fund’s returns. These costs include management fees, brokerage charges, audit and legal fees, marketing expenses, and other operational costs. Each of these elements affects the overall total expense ratio and reduces the net returns for investors.
The brokerage fee is the cost paid to brokers who execute trades on behalf of the mutual fund. These fees are incurred every time the fund buys or sells securities. Actively managed funds typically have higher brokerage costs due to frequent trading, while passive funds incur lower costs as they trade less frequently.
The 12B-1 charge covers marketing and distribution expenses for mutual funds. It is used to promote the fund and attract new investors. This fee is calculated as a percentage of the fund's net assets and is included in the overall total expense ratio.
The management fee is charged by the asset management company (AMC) for managing the mutual fund. It compensates the fund managers and supports the fund's operational infrastructure. This fee tends to be higher in actively managed funds due to intensive research and trading.
The distribution fee is paid to intermediaries who sell mutual fund schemes to investors. It compensates distributors for their role in bringing investors to the fund. The distribution fee can vary depending on the fund and its distribution strategy.
Other operational expenses cover a range of costs associated with running the mutual fund. These may include custodial fees, registrar charges, trustee fees, and any additional administrative expenses. These costs collectively contribute to the total expense ratio.
The accounting fee is related to maintaining accurate financial records and complying with regulatory requirements. It includes the costs of preparing financial statements, record-keeping, and reporting obligations. These fees are essential to ensure compliance and transparency in mutual fund operations.
Each of these costs plays a significant role in determining the TER in mutual fund, influencing the overall returns that investors receive.
The Securities and Exchange Board of India (SEBI) has set limits on the total expense ratio (TER) that mutual funds can charge. These limits ensure that investors are not overcharged and that mutual funds remain competitive. The TER is calculated as a percentage of the fund’s total assets, and the limits vary depending on the size of the assets under management (AUM).
The table below shows the maximum TER allowed for equity and debt mutual funds based on the AUM slab. These limits encourage transparency and help investors make informed decisions about what is TER in mutual fund and its impact on their returns.
Assets Under Management (AUM) | TER for Equity Funds | TER for Debt Funds |
On the first ₹500 crore | 2.25% | 2.00% |
On the next ₹250 crore | 2.00% | 1.75% |
On the next ₹1,250 crore | 1.75% | 1.50% |
On the next ₹3,000 crore | 1.60% | 1.35% |
On the next ₹5,000 crore | 1.50% | 1.25% |
On the next ₹40,000 crore | TER reduction of 0.05% for every ₹5,000 crore increase | TER reduction of 0.05% for every ₹5,000 crore increase |
Above ₹50,000 crore | 1.05% | 0.80% |
These limits ensure that larger funds reduce their TER as their AUM grows. As a result, funds with higher AUMs become more cost-efficient, benefiting investors in the long term.
The TER in mutual fund has a direct impact on the net returns earned by investors. Since TER is deducted from the fund’s total assets, a higher TER reduces the effective return received by the investor. For instance, if a fund generates 8% returns and has a TER of 2%, the net return for the investor would be 6%.
Lower TERs allow investors to retain a larger portion of the fund’s returns, whereas higher TERs may erode the returns, especially over longer investment periods.
The total expense ratio plays a crucial role in determining the overall profitability of a mutual fund investment. Investors must evaluate the TER to ensure that they choose cost-effective funds that align with their financial goals. Below are the key factors to consider while assessing the importance of TER:
The total expense ratio directly reduces the returns from a mutual fund. A higher TER means that a greater portion of the fund’s returns is used to cover operational costs, leaving investors with a lower net return. Over time, this reduction can significantly impact the overall gains from the fund.
Direct plans of mutual funds usually have a lower TER in mutual fund compared to regular plans. This is because they do not involve intermediaries or distributors, reducing the associated distribution costs. Consequently, direct plans tend to deliver higher returns than regular plans, making them a preferred option for cost-conscious investors.
The total expense ratio helps investors estimate the cost of maintaining their mutual fund investments. Since the TER is deducted from the fund’s returns, understanding these costs in advance allows investors to align their investment goals with the expected net returns. Comparing the TER of various mutual funds enables investors to choose the most cost-effective options.
By understanding and analysing the total expense ratio, investors can make more informed decisions about their mutual fund investments and optimise their returns over the long term.
Fund houses frequently change the total expense ratio (TER) to manage their operational costs and remain competitive in the market. TER changes are influenced by several factors, such as fluctuations in assets under management (AUM), regulatory adjustments, and investor demand.
When the AUM increases, the fixed costs of managing the fund are spread over a larger asset base, leading to a lower TER in mutual fund. Conversely, a decline in AUM results in higher TERs, as the same costs are distributed over fewer assets.
The Securities and Exchange Board of India (SEBI) mandates specific TER limits for various mutual fund categories. Fund houses revise their TER periodically to ensure compliance with these regulations while optimising operational costs.
In a competitive market, fund houses adjust TER to attract and retain investors. A lower TER makes the fund more appealing, while a higher TER may be justified by delivering higher returns.
AUM Range | Maximum TER for Equity Funds | Maximum TER for Debt Funds |
Up to ₹500 crore | 2.25% | 2.00% |
₹500 crore to ₹750 crore | 2.00% | 1.75% |
₹750 crore to ₹2,000 crore | 1.75% | 1.50% |
₹2,000 crore to ₹5,000 crore | 1.60% | 1.35% |
₹5,000 crore to ₹10,000 crore | 1.50% | 1.25% |
₹10,000 crore to ₹50,000 crore | Reduction by 0.05% per ₹5,000 crore increase | Reduction by 0.05% per ₹5,000 crore increase |
Above ₹50,000 crore | 1.05% | 0.80% |
Assets under management (AUM) play a significant role in determining the TER in mutual fund. As the AUM grows, the fund’s operational costs are distributed over a larger asset base, resulting in a lower TER. This cost efficiency benefits investors as they retain a higher proportion of the fund’s returns.
Larger funds typically have lower TERs due to economies of scale. As the AUM increases, fixed expenses such as administrative and operational costs are spread across more assets, reducing the TER percentage.
In contrast, a decrease in AUM results in a higher TER since the same costs are distributed over fewer assets. This can negatively affect investor returns, making the fund less attractive.
SEBI has introduced a tiered structure for TER, where the TER decreases as the AUM increases. This ensures that large mutual funds pass on the benefits of scale to investors by reducing their expense ratios.
A lower TER translates into higher net returns for investors, especially in the long term. As mutual funds grow, the operational efficiency improves, allowing them to reduce costs and offer competitive returns.
Investors should consider the impact of AUM on the total expense ratio while selecting a mutual fund. Opting for funds with higher AUM often leads to lower TER and better returns.
Mutual funds operate in a competitive environment where attracting and retaining investors is crucial. Adjusting the total expense ratio helps fund houses manage their costs and deliver competitive returns.
A lower TER in mutual fund makes the scheme more appealing, as it ensures that a larger portion of the returns goes to the investor. Fund houses often reduce TER to attract cost-conscious investors looking for efficient investment options.
Actively managed funds incur higher research and trading costs, justifying a slightly higher TER. However, these funds need to demonstrate consistent performance to retain investor interest despite a higher expense ratio.
Fund houses periodically review and adjust their TER to ensure that they comply with SEBI guidelines while maintaining their competitive edge. These adjustments allow them to manage changes in operational costs and maintain profitability.
Maintaining a balance between a competitive TER and covering operational costs is essential for fund houses. Too high a TER can deter potential investors, while too low a TER may compromise the fund’s ability to cover expenses.
Funds with a lower TER often encourage long-term investments by ensuring that the compounded returns are not eroded by excessive costs. This strategy helps fund houses build a loyal investor base.
Fund houses monitor market trends and competitor strategies to adjust their TER accordingly. This proactive approach ensures that they remain relevant in an evolving investment landscape.
TER and GER represent the costs associated with managing a mutual fund but differ in their scope and inclusions. Understanding these differences helps investors make informed decisions.
Criteria | Total Expense Ratio (TER) | Gross Expense Ratio (GER) |
Definition | Measures total costs incurred by a fund | Includes all fees before waivers/reimbursements |
Scope | Covers management, legal, audit, and operational costs | Includes costs incurred before any waivers or reimbursements |
Impact on Investors | Reflects actual costs borne by investors | May not reflect the final cost paid by investors |
Inclusion of Waivers | Accounts for fee waivers or reimbursements | Excludes any fee waivers or reimbursements |
Purpose | Helps investors assess net returns | Useful for understanding initial fund costs |
Regulatory Importance | Mandated disclosure for investor transparency | Primarily for internal fund management review |
By comparing the total expense ratio with the gross expense ratio, investors can better understand the true cost of investing in a mutual fund and evaluate its cost-effectiveness.
When investing in mutual funds, understanding the total expense ratio (TER) is essential. TER reflects the cost incurred by the fund to manage and operate the investment. Since it directly affects returns, considering the following factors can help investors make informed decisions.
Fund houses are required to disclose the TER in mutual fund reports, ensuring transparency for investors. These disclosures help investors understand the exact cost associated with a particular scheme, allowing them to compare funds before making a decision.
The total expense ratio is influenced by several factors, such as the type of fund, AUM size, and the fund’s management style. Actively managed funds usually have a higher TER due to research and operational costs, whereas passively managed funds tend to have a lower TER.
While the total expense ratio captures most operating costs, it may not include certain charges. These can include transaction fees, brokerage commissions, exit loads, and performance fees, which may affect the overall returns from the fund.
Considering the TER in mutual fund investments from a long-term perspective is crucial. Even a small difference in TER can have a compounding effect on returns over time. A lower TER may yield higher returns, especially in long-term investments.
The total expense ratio is the percentage of a mutual fund’s total assets that goes toward covering operating expenses. These costs include management, distribution, legal, and audit fees, which are deducted from the fund’s returns.
A higher TER in mutual fund investments reduces the overall returns, as a greater portion of the gains is allocated to covering operational costs. Conversely, a lower TER ensures that a larger share of the fund’s performance is passed on to investors.
It is advisable for investors to review the total expense ratio of their mutual funds regularly. Over time, changes in TER can affect returns. Monitoring TER ensures that the investment remains cost-effective and aligned with financial goals.
The TER in mutual fund investments serves as an effective comparison tool for evaluating different funds. By comparing TERs across similar schemes, investors can determine which fund offers better value by charging lower operational costs.
Although the total expense ratio helps investors evaluate the costs of managing a mutual fund, it has certain limitations. TER does not always capture one-time costs, such as transaction fees or redemption charges, which can impact overall returns.
Additionally, actively managed funds often have a higher TER in mutual fund investments due to increased management and operational costs. While these funds may aim to generate higher returns, there is no guarantee that the returns will always justify the higher expense ratio.
Understanding what is TER in mutual fund investments helps investors assess the true cost of maintaining a fund. Since TER directly affects returns, it is essential to compare TERs across different schemes and evaluate the fund’s performance. By selecting funds with lower TERs and regularly monitoring changes, investors can ensure that their investments remain aligned with their financial objectives.
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An ideal total expense ratio (TER) varies by fund type and management style. For actively managed mutual funds, a TER between 0.5% and 0.75% is generally considered reasonable. Ratios exceeding 1.5% may be viewed as high. Passively managed funds, such as index funds, often have lower TERs, sometimes below 0.5%.
The total expense ratio is calculated by dividing a fund's total annual operating expenses by its average net assets for the year. This ratio reflects the percentage of the fund's assets used to cover management fees, administrative costs, and other operational expenses.
The expense ratio in a mutual fund indicates the proportion of a fund's assets deducted annually to cover operating expenses. A higher expense ratio means more costs are subtracted from the fund's returns, potentially reducing the investor's net gain.
If a mutual fund incurs £1 million in annual operating expenses and has average net assets of £100 million, the total expense ratio would be 1%. This means 1% of the fund's assets are used to cover operating costs each year.
The formula to calculate the total expense ratio is:
TER = (Total Annual Fund Operating Expenses / Average Annual Net Assets) × 100
This formula expresses the fund's operating expenses as a percentage of its average net assets.
Expenses encompassed by the total expense ratio (TER) are deducted directly from a mutual fund's assets, not billed separately to investors. This deduction is reflected in the fund's net asset value (NAV), meaning investors indirectly bear these costs through a reduced NAV. The TER covers various operational expenses, including management fees, administrative costs, and other fees associated with running the fund.
An expense ratio of 0.8% is generally viewed as moderate within the mutual fund industry. Actively managed funds often have higher expense ratios, sometimes exceeding 1%, due to the intensive management involved. Conversely, passively managed funds, such as index funds, typically feature lower expense ratios, often below 0.5%. Therefore, a 0.8% expense ratio is reasonable for actively managed funds but may be considered high for passive ones.
An acceptable total expense ratio (TER) varies based on the fund's management style and investment strategy. For actively managed mutual funds, a TER between 0.5% and 1% is generally deemed reasonable, reflecting the higher costs of active management. In contrast, passively managed funds, like index funds, often have TERs below 0.5%, aligning with their lower operational costs. Investors should assess whether the fund's performance justifies its TER.
Yes, the total expense ratio (TER) directly affects a mutual fund's net asset value (NAV). The TER represents the annual fees deducted from the fund's assets to cover operating expenses. As these expenses are subtracted, they reduce the NAV, which in turn can lower the returns received by investors.
Trading costs, such as brokerage fees incurred from buying and selling securities within the fund, are typically not included in the total expense ratio (TER). The TER mainly covers management fees and operational expenses. However, some funds may report a separate trading expense ratio (TER) that accounts for these trading costs, providing a more comprehensive view of the total expenses affecting the fund's performance.
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